Theoretical aspects of the bid-ask spread

lupafilotaxia (75)in Project HOPE • 2 years ago

Hello dear friends, with this post I will be socializing content on financial economics useful for those who operate in the world of cryptocurrencies, specifically on the bid-ask spread, before explaining what is related to the bid-ask spread, I will first outline some conceptualizations relevant to the subject, and that in my opinion are of vital importance to understand in detail the bid-ask spread.

Price, based on the postulates of modern financial economics, from a theoretical construct, price is what bidders receive and what demanders pay.

Supply, there are different economic approaches to explaining the concept of supply, but the most intuitive and easily understood approach outlines that supply is the quantity of the asset or financial instrument that the seller offers for sale.

Demand, as opposed to supply, demand is the quantity of the asset or financial instrument that a person, be it an investor or a trader, wishes to buy.

Bid price (purchase), theoretically, the bid price is the highest price that a buyer is willing to pay for an asset or financial instrument.

The bid (ask) price is the lowest price at which the seller is willing to sell its asset or financial instrument.

The Bid-Ask Spread is the difference between the bid price and the ask price of an asset or financial instrument to be traded in a given market.

It is considered that the Bid-Ask Spread is one of the main components of the price implicit in a negotiation, it is important to emphasise that in any financial market, whether physical or virtual, imbalances or differences are generated between supply and demand, an element that is usually considered as the kinetic force that gives life to the markets, basically because when differences are generated between supply and demand, conditions are created that allow both the buyer and the seller to be able to negotiate.